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As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

Jay LaPrete/Associated Press

Jennifer Brunner, the secretary of state of Ohio, has highlighted examples of what her office considers possible notary abuse.

The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.

Problems emerging in courts across the nation are varied but all involve documents that must be submitted before foreclosures can proceed legally. Homeowners, lawyers and analysts have been citing such problems for the last few years, but it appears to have reached such intensity recently that banks are beginning to re-examine whether all of the foreclosure papers were prepared properly.

In some cases, documents have been signed by employees who say they have not verified crucial information like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary.

Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires.

On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries. Additional problems have emerged when multiple banks have all argued that they have the right to foreclose on the same property, a result of a murky trail of documentation and ownership.

There is no doubt that the enormous increase in foreclosures in recent years has strained the resources of lenders and their legal representatives, creating challenges that any institution might find overwhelming. According to the Mortgage Bankers Association, the percentage of loans that were delinquent by 90 days or more stood at 9.5 percent in the first quarter of 2010, up from 4 percent in the same period of 2008.

But analysts say that the wave of defaults still does not excuse lenders’ failures to meet their legal obligations before trying to remove defaulting borrowers from their homes.

“It reflects the hubris that as long as the money was going through the pipeline, these companies didn’t really have to make sure the documents were in order,” said Kathleen C. Engel, dean for intellectual life at Suffolk University Law School and an expert in mortgage law. “Suddenly they have a lot at stake, and playing fast and loose is going to be more costly than it was in the past.”

Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices. Last week, Jennifer Brunner, the secretary of state of Ohio, referred examples of what her office considers possible notary abuse by Chase Home Mortgage to federal prosecutors for investigation.

The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.

Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.

In Florida, problems with foreclosure cases are especially acute. A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents, according to chief judge Lee E. Haworth.

“We have sent repeated notices to law firms saying, ‘You are not following the rules, and if you don’t clean up your act, we are going to impose sanctions on you,’ ” Mr. Haworth said in an interview. “They say, ‘We’ll fix it, we’ll fix it, we’ll fix it.’ But they don’t.”

As a result, Mr. Haworth said, on Sept. 17, Harry Rapkin, a judge overseeing foreclosures in the district, dismissed 61 foreclosure cases. The plaintiffs can refile but they need to pay new filing fees, Mr. Haworth said.

The byzantine mortgage securitization process that helped inflate the housing bubble allowed home loans to change hands so many times before they were eventually pooled and sold to investors that it is now extremely difficult to track exactly which lenders have claims to a home.

Many lenders or loan servicers that begin the foreclosure process after a borrower defaults do not produce documentation proving that they have the legal right to foreclosure, known as standing.

As a substitute, the banks usually present affidavits attesting to ownership of the note signed by an employee of a legal services firm acting as an agent for the lender or loan servicer. Such affidavits allow foreclosures to proceed, but because they are often dubiously prepared, many questions have arisen about their validity.

Although lawyers for troubled borrowers have contended for years that banks in many cases have not properly documented their rights to foreclose, the issue erupted in mid-September when GMAC said it was halting foreclosure proceedings in 23 states because of problems with its legal practices. The move by GMAC followed testimony by an employee who signed affidavits for the lender; he said that he executed 400 of them each day without reading them or verifying that the information in them was correct.

JPMorgan Chase and Bank of America followed with similar announcements.

But these three large lenders are not the only companies employing people who have failed to verify crucial aspects of a foreclosure case, court documents show.

Last May, Herman John Kennerty, a loan administration manager in the default document group of Wells Fargo Mortgage, testified to lawyers representing a troubled borrower that he typically signed 50 to 150 foreclosure documents a day. In that case, in King County Superior Court in Seattle, he also stated that he did not independently verify the information to which he was attesting.

Wells Fargo did not respond to requests for comment.

In other cases, judges are finding that banks’ claims of standing in a foreclosure case can conflict with other evidence.

Last Thursday, Paul F. Isaacs, a judge in Bourbon County Circuit Court in Kentucky, reversed a ruling he had made in August giving Bank of New York Mellon the right to foreclose on a couple’s home. According to court filings, Mr. Isaacs had relied on the bank’s documentation that it said showed it held the note underlying the property in a trust. But after the borrowers supplied evidence indicating that the note may in fact reside in a different trust, the judge reversed himself. The court will revisit the matter soon.

Bank of New York said it was reviewing the ruling and could not comment.

Another problematic case involves a foreclosure action taken by Deutsche Bank against a borrower in the Bronx in New York. The bank says it has the right to foreclose because the mortgage was assigned to it on Oct. 15, 2009.

But according to court filings made by David B. Shaev, a lawyer at Shaev & Fleischman who represents the borrower, the assignment to Deutsche Bank is riddled with problems. First, the company that Deutsche said had assigned it the mortgage, the Sand Canyon Corporation, no longer had any rights to the underlying property when the transfer was supposed to have occurred.

Additional questions have arisen over the signature verifying an assignment of the mortgage. Court documents show that Tywanna Thomas, assistant vice president of American Home Mortgage Servicing, assigned the mortgage from Sand Canyon to Deutsche Bank in October 2009. On assignments of mortgages in other cases, Ms. Thomas’s signatures differ so wildly that it appears that three people signed the documents using Ms. Thomas’s name.

Given the differences in the signatures, Mr. Shaev filed court papers last July contending that the assignment is a sham, “prepared to create an appearance of a creditor as a real party in interest/standing, when in fact it is likely that the chain of title required in these matters was not performed, lost or both.”

Mr. Shaev also asked the judge overseeing the case, Shelley C. Chapman, to order Ms. Thomas to appear to answer questions the lawyer has raised.

John Gallagher, a spokesman for Deutsche Bank, which is trustee for the securitization that holds the note in this case, said companies servicing mortgage loans engaged the law firms that oversee foreclosure proceedings. “Loan servicers are obligated to adhere to all legal requirements,” he said, “and Deutsche Bank, as trustee, has consistently informed servicers that they are required to execute these actions in a proper and timely manner.”

Reached by phone on Saturday, Ms. Thomas declined to comment.

The United States Trustee, a unit of the Justice Department, is also weighing in on dubious court documents filed by lenders. Last January, it supported a request by Silvia Nuer, a borrower in foreclosure in the Bronx, for sanctions against JPMorgan Chase.

In testimony, a lawyer for Chase conceded that a law firm that had previously represented the bank, the Steven J. Baum firm of Buffalo, had filed inaccurate documents as it sought to take over the property from Ms. Nuer.

The Chase lawyer told a judge last January that his predecessors had combed through the chain of title on the property and could not find a proper assignment. The firm found “something didn’t happen that needed to be fixed,” he explained, and then, according to court documents, it prepared inaccurate documents to fill in the gaps.

The Baum firm did not return calls to comment.

A lawyer for the United States Trustee said that the Nuer case “does not represent an isolated example of misconduct by Chase in the Southern District of New York.”

Chase declined to comment.

“The servicers have it in their control to get the right documents and do this properly, but it is so much cheaper to run it through a foreclosure mill,” said Linda M. Tirelli, a lawyer in White Plains who represents Ms. Nuer in the case against Chase. “This is not about getting a free house for my client. It’s about a level playing field. If I submitted false documents like this to the court, I’d have my license handed to me.”

Nothing could be further from the truth. According to the FTC and its law enforcement partners:

there is no evidence that forensic loan audits will help you get a loan modification or any other foreclosure relief, even if they’re conducted by a licensed, legitimate and trained auditor, mortgage professional or lawyer.

some federal laws allow you to sue your lender based on errors in your loan documents. But even if you sue and win, your lender is not required to modify your loan simply to make your payments more affordable.

if you cancel your loan, you will have to return the borrowed money, which may result in you losing your home.

If you are in default on your mortgage or facing foreclosure, you may be targeted by a foreclosure rescue scam. The FTC wants you to know how to recognize the telltale signs and report them. If you are faced with foreclosure, the FTC says legitimate options are available to help you save your home.

Spotting a Scam

If you’re looking for foreclosure prevention help, avoid any business that:

guarantees to stop the foreclosure process – no matter what your circumstances are

instructs you not to contact your lender, lawyer or credit or housing counselor

collects a fee before providing any services accepts payment only by cashier’s check or wire transfer

encourages you to lease your home so you can buy it back over time

recommends that you make your mortgage payments directly to it, rather than your lender

urges you to transfer your property deed or title to it

offers to buy your house for cash at a fixed price that is inappropriate for the housing market

pressures you to sign papers you haven’t had a chance to read thoroughly or that you don’t understand.

Finding Legitimate Help

Housing experts say that when you’re behind on your mortgage payments, maintaining communication with your lender is the most important thing you can do. Contact your lender or servicer immediately if you’re having trouble paying your mortgage or you have received a foreclosure notice. You may be able to negotiate a new repayment schedule.

Company Stops Insuring Titles in Chase Foreclosures

By DAVID STREITFELD

Published: October 2, 2010

A major title insurance company has stopped insuring homes foreclosed by JPMorgan Chase, another sign that the controversy over the legal practices of the big lenders is starting to influence the housing market.

The company, Old Republic National Title Insurance, told its agents Friday that it would not write policies on foreclosed Chase properties until “the objectionable issues have been resolved,” according to a memorandum sent out by the firm’s underwriting department.

A Chase spokesman declined to comment. Old Republic executives did not return calls for comment. The title insurer, which is based in Minneapolis, said earlier in the week that it would not write policies for properties that had been foreclosed by another big lender, GMAC Mortgage.

As GMAC and Chase try to deal with questions over their legal methods, they have halted all foreclosures in the 23 states where they need a court’s approval. Late Friday, Bank of America said it would stop all its pending foreclosures in those states as well.

GMAC and Bank of America have declined to say how many cases are involved. Chase said it was halting 56,000 cases. About two million households in the country are in foreclosure, and millions more are on the verge.

After a lender seizes a home in a foreclosure case and the defaulting homeowner is, if necessary, evicted, the company works with local real estate agents to prepare the house for sale. The National Association of Realtors said distressed sales, including foreclosures, were 34 percent of all existing home sales in August. In some stricken areas, the percentage is much higher.

When foreclosures are done with faulty documentation, that could leave the new owners of the house vulnerable to claims. Title insurance protects the buyer against defects, errors or omissions in the chain of title.

Old Republic said in the memorandum that its agents were already reporting written cancellations of contracts involving both Chase and GMAC.

Shares of the major title insurance companies dropped on Friday amid concern that their business would suffer as a result of the foreclosure freezes. Fidelity National Financial fell more than 4 percent, while First American Financial dropped 3 percent.

Fidelity National issued a statement saying it did not believe the problems with the foreclosure process would have “a material adverse impact.”

Mark P. Stopa, a lawyer in Florida who represents defaulting homeowners, said that if more title insurance firms began to shy away from insuring foreclosed properties, the entire housing market could suffer. The prices of foreclosures would plummet, because lenders will not issue a new mortgage without title insurance.

“Judges have to force banks to do foreclosures correctly,” Mr. Stopa said. But that would require a significant increase in staff, he said, and “I’ll believe it when I see it.”

Gold Member Roger Taylor emailed me this article in the New York Times.

This is huge and will greatly affect the real estate market across America.

Chew on this a bit, not only will this slow down and halt foreclosures creating a massive stockpile of defaults, but there will also be many other critical issues for both homeowners and investors alike.

For Example:

Title Companies will stop writing title insurance. Old Republic has already announced it will not insure any properties having a GMAC mortgage.

Investors and Homeowners alike, who have already purchased "bank owned" real estate or HUD properties, may find themselves with a toxic property because it may have an unmarketable title due to all of the huge lenders and law firms having openly admitted falsifying documents during the foreclosure process.

Homeowners in default, by the masses, will be filing all kinds of action demanding lenders produce all of the original and real documents involving their mortgage. Keep in mind, a California bankruptcy court has already ruled that "MERS" is NOT sufficient proof of ownership of notes and mortgages. In other words, the lender who claims to own the note and mortgage, must be able to produce the original promissory note and documents. (Notes and mortgages were sliced, diced, and chopped up and sold on the secondary market using MERS without any concern for the physical documents themselves.

Stay Tuned…

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Bank of America to Freeze Foreclosure Cases

By DAVID STREITFELD

Published: October 1, 2010 in NYT

Bank of America, the country’s largest mortgage lender by assets, said on Friday that it was reviewing documents in all foreclosure cases now in court to evaluate if there were errors.

It is the third major lender in the last two weeks to freeze foreclosures in the 23 states where the process is controlled by courts.

But Bank of America went further than the first two lenders, GMAC Mortgage and JPMorgan Chase, which have said they will amend paperwork only in cases they think were improperly done. So far, that has amounted to only a handful of cases.

Bank of America, in an e-mailed statement, said it would “amend all affidavits in foreclosure cases that have not yet gone to judgment.”

That could mean tens of thousands of foreclosure cases would be in limbo for months or, if the consumers in default hire lawyers, years.

Spokesmen for the bank said that they were uncertain how many cases the lender currently had in court. They provided no timeline or explanation for the freeze, saying only that the bank planned to eventually resubmit all the cases.

The moratorium is likely to further fuel the uproar over the foreclosure tactics of the big lenders, which continued to have political ramifications on Friday.

Before Bank of America’s announcement, Richard Blumenthal, the Connecticut attorney general, asked judges in his state to put a halt to all foreclosures for 60 days. Connecticut is one of the 23 states where foreclosure is a judicial matter. Others include Illinois, Florida, New Jersey and New York.

Mr. Blumenthal, who is running for senator in Connecticut, said the freeze “should stop a foreclosure steamroller based on defective documents and enable effective remedies.”

California’s attorney general, Jerry Brown, said that Chase should stop any foreclosures in the state until it proved that it was following the law. Mr. Brown, who is a candidate for governor, earlier made the same demand of GMAC.

In California, lenders generally pursue foreclosures outside of the court system, so they are presumably still proceeding with evictions. Chase declined to say whether it would comply with Mr. Brown’s comments.

Chase said this week that it had frozen 56,000 foreclosure cases. GMAC, which is largely owned by the Treasury after receiving $17 billion in federal bailout money to prevent its collapse, has repeatedly declined to say how many cases it is halting.

The nation’s two other major lenders, Citi and Wells Fargo, have issued statements maintaining they have no problems with their cases.

The problem for all the lenders that have announced moratoriums stems directly from their attempt to deal with an unprecedented number of foreclosures.

According to LPS Applied Analytics, a mortgage data firm, 2 million households are in foreclosure. Another 2.37 million households are seriously delinquent and waiting for their lender to take action.

Sometimes these loans are still owned by the lender but often, the banks are merely the loan servicer acting on behalf of the owner. Many of the loans are owned by Fannie Mae and Freddie Mac, the mortgage holding companies now controlled by the Treasury. In other cases the loans have been sold to private investment pools.

Confronted with so many cases, the lenders tried to process them on a wholesale basis, with the goal of avoiding the expense of a full trial and instead getting summary judgments.

The tool for doing this was the so-called robo-signers, in which midlevel bank executives would sign thousands of affidavits a month attesting that they had personal knowledge that the facts of the case were as presented. The affidavits were prepared by lawyers who were paid a flat fee, which also placed a premium on volume.

When defense lawyers started deposing these robo-signers, they acknowledged that they could not possibly have knowledge of all the cases. The banks say this is a technicality and they will refile the proper affidavits. The defense lawyers say the practice calls the cases, and indeed the entire process, into question.

Thomas Lawler, a housing economist, said the current mess was predictable and probably inevitable. Lenders made their money by making loans and then simply and efficiently servicing them by collecting the checks every month. They were never prepared to deal with the labor-intensive problems of delinquency and foreclosure.

“However, the foreclosure crisis is now almost three years old, and not having staffed up sufficiently to deal with the problems with inadequate staffing borders on criminal,” Mr. Lawler said. “I mean, jeepers, look at the unemployment rate; how hard would it have been to hire more folks?”

Mark Stopa, a Florida lawyer who represents defaulting homeowners, said the magnitude of the current troubles depends on how title insurance companies react. If those firms begin to shy away from insuring foreclosed properties because they think those properties are vulnerable to claims, he said, the entire housing market could suffer.

“Judges have to force banks to do foreclosures correctly,” Mr. Stopa said. But he noted that would require a significant increase in staff. “I’ll believe it when I see it,” he said.

Stocks of the major title insurance companies dropped on Friday amid concern that their business would suffer as a result of the foreclosure freezes. Fidelity National Financial fell more than 4 percent, while First American Financial dropped 3 percent.

One firm, Old Republic National Title, said this week it would not issue policies on GMAC foreclosures until further notice.

The foreclosure machinery that has forced millions of Americans out of their homes is beginning to seize up as some lenders and their lawyers are accused of cutting corners in their pursuit of rapid home repossessions.

Matthew Staver/Bloomberg News

GMAC and JPMorgan Chase have acknowledged legal missteps, and have suspended new foreclosure actions in 23 states.

Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks.

Even lenders with no known problems are expected to approach defaulting homeowners more cautiously and look more aggressively for resolutions short of outright eviction.

Despite the turmoil, some economists said the breakdown could ultimately lay the groundwork for a real estate recovery.

Stricken neighborhoods across the country, for example, could benefit. One big factor undermining home sales is fear of a large number of foreclosed homes coming to the market. If the foreclosures are delayed or never happen, housing prices might find a floor.

“Maybe this is like shock therapy,” said the economist Karl E. Case. “Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody.”

While such a happy ending is possible, the near term is more likely to produce paralysis and confusion.

As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners.

Apparently alarmed about such a possibility, one of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy.

GMAC declined to comment, and Old Republic representatives did not return calls.

GMAC has acknowledged legal missteps in processing mortgages, and JPMorgan Chase has acknowledged the possibility of missteps, and both have suspended all foreclosures in the 23 states where they need a court’s approval. That’s 56,000 in the case of Chase alone; GMAC declined to provide a number.

Attorneys general in half a dozen states are demanding action or opening investigations. The Treasury Department said Thursday it was asking regulators to look into “these troubling developments.”

“We’re seeing a fundamental breakdown in the system, because no one cared that much about getting things right,” said Representative Alan Grayson, a Democrat of Florida, who unsuccessfully asked the Florida Supreme Court to halt all foreclosures in that state.

Wall Street was examining the impact the disclosures could have on the lenders. Moody’s Investors Service has placed the servicer ratings of GMAC and Chase on review for possible downgrade.

The federal government has been the majority owner of GMAC since supplying $17 billion to prevent the lender’s failure during the financial crisis.

Other lenders said Thursday that their foreclosure filings, including the crucial affidavits, had been properly done.

A Citigroup spokesman said the lender required “annual training for our foreclosure employees on the proper execution of affidavits, including having personal knowledge of the information in the affidavit.”

A Wells Fargo spokeswoman said “the affidavits we sign are accurate.” A spokesman for Bank of America, Rick Simon, said, “We do not have anything to tell you at this time.”

GMAC and Chase are in trouble because, overwhelmed with foreclosures, they tried to process them as quickly and cheaply as possible, defense lawyers say. The companies say they are reviewing their procedures to take care of any violations.

The missteps stemmed from the affidavits the lenders file as they seek a quick or summary judgment in thousands of foreclosure cases. The affidavits state certain facts about the case, including the amount owed, which the signer indicates he has personal knowledge of. Without the affidavit, the lender would have to prove the facts at trial.

In depositions taken by lawyers for homeowners, executives at GMAC and Chase said they or their teams signed 10,000 or more affidavits and related documents a month. That did not give them time to review the cases.

Defense lawyers say the disclosures are symptomatic of the carelessness, if not outright fraud, that lenders have been exhibiting for years in their rush to file cases. Many necessary documents have disappeared, with defense lawyers saying the lenders often do not even have standing to foreclose.

In a number of pending cases in Florida, defense lawyers there said, GMAC has already withdrawn affidavits. The lawyers said they would try to have the cases thrown out for possible fraud, although they acknowledged that might be difficult.

GMAC said it would refile the affidavits. Chase said it had not withdrawn any affidavits.

“The way the plaintiffs’ lawyers have handled this has corrupted our legal system,” said Thomas Cox, a Maine lawyer whose deposition of a GMAC executive in June helped prompt the current disclosures. “They tried to manufacture foreclosures the way you’d manufacture cars, on an assembly line. It can’t be done that way.”

Mr. Cox is representing pro bono a rural woman who is in foreclosure on a $82,000 mortgage. The plaintiff in the case is Fannie Mae, the mortgage holding company that failed during the financial crisis and is now under government conservatorship. GMAC serviced the loan for Fannie Mae.

This week, the judge in the case set aside his summary judgment in favor of Fannie when he read Mr. Cox’s deposition of a GMAC executive, Jeffrey Stephan, who said he never reviewed the file he had signed. The case will now go to trial.

“I don’t think they are going to give up easily,” said Mr. Cox.

As the foreclosure crisis has deepened, the length of time borrowers spend waiting for the end has lengthened.

In January 2009 the time between the owner’s first missed payment and eviction was 319 days, according to LPS Applied Analytics. By August it was 478 days.

Since spring, the data firm says, the lenders have been trying to clear their backlog. They have stepped up the rate at which they put defaulting owners into the formal foreclosure process. In August, they started 283,000 foreclosures, up from 220,000 in April.

Now, as the lenders are pressed to examine more closely their filings, those foreclosure starts are likely to fall, prolonging the owner’s time in limbo. Many borrowers use this period, when they are living in their home but not paying for it, to try and get their financial house back in order.

On my way home I heard this on the radio with ABC news and did a double take. I searched the news wires and found this. This could be huge because they are now calling for industry wide pauses in the foreclosure process. STAY TUNED!

By Ariana Eunjung Cha

Washington Post Staff Writer

Wednesday, September 29, 2010; 8:47 PM

J.P. Morgan Chase, one of the nation’s leading banks, announced Wednesday that it will freeze foreclosures in about half the country because of flawed paperwork, a move that Wall Street analysts said will pressure the rest of the industry to follow suit.

The bank’s decision will affect 56,000 borrowers in 23 states where allegations of forged documents and signatures and other similar problems threaten to overturn court-ordered evictions. Yet the impact may be much broader, given J.P. Morgan’s stature within the industry. If other banks adopt the same approach, the foreclosure process in many parts of the country would grind to a halt.

Officials at Fitch Ratings, a credit rating firm that measures the health of companies, said the "defects" found in foreclosure documents at J.P. Morgan are industry-wide. Underscoring that concern, Fitch said it is considering whether to lower the grades it gives to the mortgage servicing divisions of the nation’s largest lenders.

"Over the next few weeks, we expect to see more and more companies come out with similar announcements," said Diane Pendley, a managing director at Fitch.

The paperwork problems at J.P. Morgan mirror those uncovered last week at another large mortgage lender, Ally Financial. But J.P. Morgan’s decision is expected to have a much greater effect on the industry because it is held in high regard by its peers. By contrast, Ally, formerly known as GMAC, is a still under the cloud of a $17 billion federal bailout package that it has been unable to pay back.

Both firms are investigating whether foreclosure files were improperly or fraudulently assembled, and whether their employees failed to review the documents even as they signed off on them.

A growing number of homeowners – even those who missed their mortgage payments – are now scrambling to challenge the proceedings, weighing down an already overburdened court system.

J.P. Morgan had declined to address the matter until Wednesday. But in a sworn deposition, one of the bank’s employees, Beth Ann Cottrell, admitted that she and her team signed off on about 18,000 foreclosures a month without checking whether they were justified.

J.P. Morgan spokesman Tom Kelly said Wednesday that the firm "does not expect to find any factual problems or that customers have been harmed, but if we do find any cases we will take appropriate action."

In addition to the measures that private lenders have taken, four states – California, Colorado, Connecticut and Illinois – have called for a moratorium on all foreclosures initiated by Ally, while attorneys general in seven other states have opened civil or criminal investigations related to flawed foreclosures.

Even as the extent of the problems has become more apparent, the Treasury Department has declined to answer specific questions about the matter since it surfaced last week.

On Wednesday, Treasury spokesman Mark Paustenbach said that officials have been in touch with Ally and that they expect it to take "prompt action to correct any errors." He added that the agency is "monitoring their progress."

Treasury officials raised the issue personally with Ally chief executive Michael Carpenter during a recent meeting, according to an administration official.

Yet the agency’s response has frustrated some consumer advocates. A few lawmakers have also been calling for investigations of whether homeowners are being improperly removed from their homes.

Sen. Al Franken (D-Minn.) said Wednesday that the Treasury Department and relevant federal agencies should begin their own inquiry.

"With millions of families losing their homes, it’s inexcusable for companies like Ally to be this patently negligent," he said. "I want the federal government to hold Ally accountable and ensure that homeowners who wrongly received foreclosure get the compensation they deserve."

Ira Rheingold, director of the National Association of Consumer Advocates, criticized the Treasury Department, saying it has not been forthcoming about what actions it is taking to the remedy the situation.

The agency has been "protecting services and investors and doing what is minimally possible to help homeowners," he said.

Other consumer advocates say administration officials are in a no-win situation. If they determine there is no reason to take action, they may be criticized for not helping homeowners. But taking extreme measures such as calling for a national moratorium on foreclosures could hurt the economy and damage the housing market.

Mark Zandi, chief economist for Moodys.com, said that, in the worst-case scenario, the document processing problems could lengthen the foreclosure process from three years to as long as a decade, especially if homeowners use the flawed paperwork to appeal their evictions.

The long holdup could have "macroeconomic consequences" as a destabilizing force on home prices. Banks could become more unwilling to extend credit to households or to small-business owners who use homes as collateral. And investors who had been keeping home prices propped up by buying foreclosures may stop and never come back.

He added, however, that that it is still an open question how the courts will handle the paperwork problems.

Ally officials on Wednesday declined to comment on any ongoing or potential investigations, but they have said that they are confident that "the processing errors did not result in any inappropriate foreclosures."

Company officials have declined to disclose how many loans may be affected and how much remedying the issue might cost, but spokesman Gina Proia said the firm "does not anticipate significant adverse effect on Ally related to this matter."

California Bankruptcy Court rules "MERS" can NOT transfer note for want of ownership and cites several cases.

The United States Bankruptcy Court for the Eastern District of California has issued a ruling dated May 20, 2010 in the matter of In Re: Walker, Case No. 10-21656-E-11 which found that MERS could not, as a matter of law, have transferred the note to Citibank from the original lender, Bayrock Mortgage Corp. The Court’s opinion is headlined stating that MERS and Citibank are not the real parties in interest.

The court found that MERS acted “only as a nominee” for Bayrock under the Deed of Trust and there was no evidence that the note was transferred. The opinion also provides that “several courts have acknowledged that MERS is not the owner of the underlying note and therefore could not transfer the note, the beneficial interest in the deed of trust, or foreclose on the property secured by the deed”, citing the well-known cases of In Re Vargas (California Bankruptcy Court), Landmark v. Kesler (Kansas decision as to lack of authority of MERS), LaSalle Bank v. Lamy (New York), and In Re Foreclosure Cases (the “Boyko” decision from Ohio Federal Court).

The opinion states: “Since no evidence of MERS’ ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law.”

Read that again: “Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note IS VOID UNDER CALIFORNIA LAW.” This conclusion was based upon California law cited in the opinion that the note and the mortgage are inseparable, with the former being essential while the latter is “an incident”, and that an assignment of the note carries the mortgage with it, “while an assignment of the latter [the mortgage] alone is a nullity.” As MERS must own the note in order to assign the incident deed of trust, MERS is legally precluded from assigning the deed of trust for want of ownership of the note, and cannot assign the note in any event as it never owned it. MERS’ lack of ownership interest in promissory note is a matter of decided case law based on a record stipulation of MERS’ own lawyers in the MERS v. Nebraska Dept. of Finance decision.

This opinion thus serves as a legal basis to challenge any foreclosure in California based on a MERS assignment; to seek to void any MERS assignment of the Deed of Trust or the note to a third party for purposes of foreclosure; and should be sufficient for a borrower to not only obtain a TRO against a Trustee’s Sale, but also a Preliminary Injunction barring any sale pending any litigation filed by the borrower challenging a foreclosure based on a MERS assignment.

The Court concluded by stating: “Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case.” Thus, any foreclosing party which is not the original lender which purports to claim payment due under the note and the right to foreclose in California on the basis of a MERS assignment does not have the right to do so under the principles of this opinion.

This ruling is more than significant not only for California borrowers, but for borrowers nationwide, as this California court made it a point to cite non-bankruptcy cases as to the lack of authority of MERS in its opinion. Further, this opinion is consistent with the prior rulings of the Idaho and Nevada Bankruptcy courts on the same issue, that being the lack of authority for MERS to transfer the note as it never owned it (and cannot, per MERS’ own contract which provides that MERS agrees not to assert any rights to mortgage loans or properties mortgaged thereby).

We thank one of our dedicated readers for providing this opinion to us.

The nation’s overburdened foreclosure system is riddled with faked documents, forged signatures and lenders who take shortcuts reviewing borrower’s files, according to court documents and interviews with attorneys, housing advocates and company officials.

THIS STORY

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The problems, which are so widespread that some judges approving the foreclosures ignore them, are coming to light after Ally Financial, the country’s fourth-biggest mortgage lender, halted home evictions in 23 states this week.

During the housing boom, millions of homeowners got easy access to mortgages while providing virtually no proof of their income or background. Now, as millions of Americans are being pushed out of the homes they can no longer afford, the foreclosure process is producing far more paperwork than anyone can read and making it vulnerable to fraud.

Ally Financial is now double-checking to make sure all documents are in order after lawsuits uncovered that a single employee of the company’s GMAC mortgage unit, a 41-year-old named Jeffrey Stephan, signed off on 10,000 foreclosure papers a month without checking whether the information justified an eviction.

Many of the homeowners in fact might have been in default. Some might have been unfairly targeted. But the flawed process is creating an opening for borrowers to contest some of the more than 2 million foreclosures that have taken place since the real estate crisis began.

The company sought to play down the impact of Stephan’s actions, saying this week that what he did amounted to a "technical" error but that the documents themselves were "factually accurate." Ally said it had no further comment Wednesday.

Forgeries

Ally wasn’t the only major lender that had a foreclosure process dependent on a few corporate bureaucrats.

Beth Ann Cottrell said in a sworn deposition in May that she signed off on thousands of foreclosures a month for JPMorgan Chase even though she did not verify the accuracy of the information.

In one instance in Palm Beach, Fla., Cottrell signed off on two documents that stated conflicting amounts of mortgage, the court testimony states. Cottrell claimed that both were signed by the borrower at closing. But the homeowner recognized that her signature had been forged, her attorney Christopher Immel said. The attorney added that such forgeries are common among the cases he’s seen. JPMorgan Chase declined to comment.

In Georgia, an employee of a document processing company, Linda Green, for years claimed to be executives of Bank of America, Wells Fargo, U.S. Bank and dozens of other lenders while signing off on tens of thousands of foreclosure affidavits. In many cases, her signature appeared to be forged by different employees.

Green worked for a foreclosure document company owned by Lender Processing Services. The company is being investigated by a U.S. attorney in Florida for allegedly using improper documentation to speed foreclosures.

Lenders have already started to withdraw foreclosures that had Green’s name on them.

Green also submitted to courts documents that listed "Bogus Assignee" as the owner of a mortgage instead of the real name. In another case, she signed as the vice president of "Bad Bene," a made-up company.

Ally’s mortgage documentation problems could extend beyond 23 states

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Michelle Kersch, a senior vice president for Lender Processing Services, said in an e-mailed statement Wednesday that the names were just "placeholders."

"Unfortunately, on occasion, incomplete documents were inadvertently recorded before the missing information was obtained," she said. "LPS regrets these errors and the use of this particular placeholder phrasing."

The company declined to comment further, citing the pending criminal investigation.

A large chunk of the nation’s foreclosures are being initiated by three companies owned by the federal government: Ally, Fannie Mae and Freddie Mac. Fannie and Freddie have said they are looking at the matter but refuse to reveal the numbers of affected homeowners.

The Obama administration has repeatedly said it would try to help homeowners facing foreclosure. But its principal mortgage-relief effort is faltering. More than half of those who enrolled in the program are have now fallen out of it, the Treasury Department said Wednesday.

This week, Treasury Secretary Timothy F. Geithner and the Obama administration’s newly appointed consumer protection adviser, Elizabeth Warren, also vowed to simplify the process for getting a mortgage.

But when asked to respond to problems plaguing foreclosures at the companies controlled by the Treasury, a spokesman repeatedly declined to respond to questions, saying only that the agency does not involve itself in the companies’ day-to-day affairs.

Judges’ oversight

Some of the problems in foreclosure paperwork are being created because mortgage loans were repackaged and resold to investors so often that the physical documents become lost. It’s the job of a document processor to present and vouch for the authenticity and accuracy of these papers, but attorneys for homeowners have unearthed examples where critical records are forged.

In theory, a judge should review the files one more time. But after the crisis produced massive numbers of delinquent homeowners, judges in many cases became overwhelmed.

Some simply took at face value the documents handed over to them by the lenders – who in many cases were not checking the files, either, according to interviews with judges, attorneys and consumer groups.

In some Florida courts, for instance, many judges automatically approve a foreclosure unless a borrower can point to a specific problem. Homeowners are given five minutes for a presentation. Often, they do not bother to show up.

Arthur M. Schack, a Kings County Supreme Court judge in Brooklyn, said it’s clear those involved in the foreclosure process are taking the legal requirements too lightly. They forget, he said, that there’s a bigger picture to think about: People are losing their homes.

Schack has become infamous among some of the nation’s most powerful banks for rejecting foreclosure motions that come across his courtroom – about half of the hundreds of files that he has reviewed over nearly three years. He said Ally’s document-processing violations shouldn’t be dismissed lightly.

"There are procedures to be followed in order to get a foreclosure, and you either get it right or not. Either you’re pregnant or not. There’s no in-between," he said.

But Judge Isaac Garb, a retired trial judge in Bucks County, Pa., who has heard many foreclosure cases and still oversees mortgage mediations, had a different view.

He said that because foreclosure files contain standard language, document processors such as Stephan do not need to review every page. He added that the signers are verifying only that the information in the file is "true and correct to the best of his/her knowledge, information and belief."

Often, homeowners are using minor problems in the documents simply to stall the foreclosure process as long as possible, Garb said.

David Berenbaum, chief program officer for the nonprofit National Community Reinvestment Coalition, said companies eager to get bad loans off their books quickly have given rise to a foreclosure system that is as faulty as the excessive lending that created the problem in the first place.

"What’s happened here is that there are these foreclosure machines that don’t do due diligence and that are profiting at the expense of consumers," he said.

Over 62 million mortgages are now held in the name of MERS, an electronic recording system devised by and for the convenience of the mortgage industry. A California bankruptcy court, following landmark cases in other jurisdictions, recently held that this electronic shortcut breaks the chain of title, voiding foreclosure.

The logical result could be 62 million homes might be foreclosure-proof.

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